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Car Prices Have Nowhere to Go But Up. Blame Climate Change

(Bloomberg) -- Volkswagen AG said higher material costs to comply with carbon emissions regulation will significantly boost the price of its cars in the medium-term, as the manufacturer joined fellow German rival BMW AG warning of challenges in the year ahead.

Cheaper cars will proportionately see the biggest price rises, Volkswagen said Friday, with increasing safety requirements an additional boost to costs.

“Volkswagen is using various resources to counteract rising costs,” VW head of sales Christian Dahlheim said on a call with reporters. “Nevertheless, it is clear that it will not be possible to completely offset the higher material costs.”

The drag on carmakers has steadily increased over the past few months, culminating in a number of profit warnings last year. Into this year, trade tensions look likely to persist, while concerns over Brexit are escalating and China’s auto market declined for the first time in two decades last year. Both Ford Motor Co. and Jaguar Land Rover announced thousands of job cuts in Europe Thursday.

On top of these factors, the payoff on the costly shift into electric cars remains years away. Sales remain at a fraction of overall deliveries, and poor charging infrastructure is keeping consumers on the fence to switch to battery cars. Volkswagen sold 100,000 plug-in and battery vehicles last year, less than 1 percent of the total.

“The challenges for our business won’t ease given the geopolitical volatile developments,” Dahlheim said in a statement, adding the world’s biggest automotive group was well positioned to navigate industry turbulence.

A slew of fresh models should help stem the tide of negative factors, VW said, such as the VW T-Cross, Seat Tarraco and revamped Audi Q3 compact sport utility vehicle. Still, demand in China and Europe, VW’s two key regions, is forecast to hover around the same level as last year, limiting growth. The U.S. vehicle market might decline slightly, and VW forecast a difficult first quarter in China.

Proving Resilient

The carmaker proved relatively resilient last year, despite the trade tensions, drop in China and stricter emissions tests in Europe triggering production bottlenecks.

Global deliveries increased by 0.9 percent to 10.8 million vehicles, while Toyota Motor Corp., its closest rival, is scheduled to release global sales results later this month.

The Porsche sports car brand, the group’s most profitable division, improved sales by 4 percent, which partly offset a 3.5 percent decline at larger premium-car unit Audi. The main VW car marque, which accounts for more than half the group’s global deliveries, eked out 0.2 percent growth last year to 6.24 million vehicles. Mass-market sister brands Skoda and Seat also improved results.

Sustaining growth in mass-market cars is set to become more difficult because of stricter emission rules, Dahlheim said. As a result, the company is reviewing its lineup of model and engine variants as rising costs bite, an issue affecting the entire automotive industry, “not just Volkswagen.”